The Foreclosure Process Varies By State
Each state has laws that govern foreclosures, including the notices that a lender must post publicly, the homeowners options for bringing the loan current and avoiding foreclosure, and the timeline and process for selling the property.
A foreclosurethe actual act of a lender seizing a propertyis typically the final step after a lengthy pre-foreclosure process. Before foreclosure, the lender may offer several alternatives to avoid foreclosure, many of which can mediate a foreclosures negative consequences for both the buyer and the seller.
In 22 statesincluding Florida, Illinois, and New Yorkjudicial foreclosure is the norm. This is where the lender must go through the courts to get permission to foreclose by proving the borrower is delinquent. If the foreclosure is approved, the local sheriff auctions the property to the highest bidder to try to recoup what the bank is owed, or the bank becomes the owner and sells the property through the traditional route to recoup its losses.
The other 28 statesincluding Arizona, California, Georgia, and Texasprimarily use nonjudicial foreclosure, also called power of sale. This type of foreclosure tends to be faster than a judicial foreclosure, and it does not go through the courts unless the homeowner sues the lender.
Financing Options For Foreclosed Homes
Private lenders tend to be skittish about financing foreclosure deals. However, several government-sponsored financing options are available for those who qualify:
- 203 loans from the Federal Housing Administration ,
- Fannie Maes HomePath ReadyBuyer program,
- The HomeSteps program through Freddie Mac.
Find A Broker Or Agent Experienced In Reos
If youre a first-time foreclosure buyer, youll want to use a real estate agent versed in REOs. You may think saving on fees and doing it yourself is the smart choice. But in the long run, an agent can save you time, money, and oftentimes frustration.
Many mortgage brokers and agents have years of experience under their belt and can steer you toward properties that meet your specifications. As always, when choosing a professional to work with, look for training, testimonials, reviews and other indicators of knowledge and experience.
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Receiving A Nod And The Borrowers Financial Options
Once a lender flags a borrower for missing their loan payments, they send a Notice of Default . A NOD is a court-filed public notice that declares the borrower has defaulted on their loan.
As the name suggests, this is a letter from the lender to the borrower notifying them of their missed payments. The borrower has 90 days from when they receive the NOD to fulfill the overdue payments.
Oftentimes, financial hardships are the reason why borrowers miss payments. They simply cannot afford to make the payments. If thatâs the case, the borrower has a few financial options to escape the foreclosure process:
Option #1: Equity
In a pre-foreclosure, the borrowerâs first option is their homeâs equity. If the borrower has equity in their home, they can sell their home to get the money needed to pay off the loan.
For example, the borrower withdrew a home loan for $1 million. If the house they bought is worth $1.5 million, they can sell it to pay the loan in full.
Option #2: Short Sale
A short sale is a request by the borrower when their home is worth less than the loan amount. For example, the total amount of the loan is $1 million but the home is only worth $800,000.
Does the borrower still owe the remaining balance on a home loan after a short sale? No. The remaining loan balance is forgiven. But, the borrower does undergo massive damage to their credit score. This will make it harder to borrow money in the future.
Who Preforeclosure Properties Are Right For
Preforeclosure homeowners frequently face financial difficulties, and some would prefer to sell the home rather than have a foreclosure appear on their credit report. Preforeclosure homes are commonly available at a reduced rate to market value for investors.
Preforeclosure property investments are right for the following investors:
- Fix-and-flippers: They use a hard money loan to buy preforeclosures that need extensive repairs, then flip the property for a profit to pay off the loan.
- Long-term investors: They purchase homes that are about to go into foreclosure, make the necessary repairs, stabilize the property, and then finish the renovations to make the property eligible for a long-term loan.
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Foreclosure Process Step : Default
A bank cant just start the foreclose process on a home whenever it wants. Homeowners have to first default on their mortgage, failing to pay their required monthly payments. And its rare for lenders to begin the foreclosure process after just one late mortgage payment.
They will usually give the borrower a grace period because they recognize the reality that people face temporary financial hardship at some point in their lives, explains Lisa Blake, a real estate broker and owner of The Blake Team in Aurora, CO.
That said, banks want their money, so borrowers can expect an influx of emails, letters, and phone calls from their lender or bank trying to collect.
Lenders usually offer alternatives during this period, including different payment plans to help the homeowner get back on track, keep their home, and keep paying their monthly mortgage bill. This is partly because its in a lenders best interest to make things workafter all, the lender wants its money. But its also the law in many states, says real estate attorney and broker Bryan Zuetel of Esquire Real Estate in Irvine, CA.
In many states, a lender or servicer cannot file a notice of default until 30 days after contacting the homeowner to assess the homeowners financial situation and explore options to avoid foreclosure, Zuetel explains.
Termed a foreclosure avoidance assessment, this period might include requests for a payment adjustment, interest adjustment, deferral, or other accommodations.
Who Conducts A Foreclosure Sale
Who conducts a foreclosure sale largely depends on the laws in the state where you live. In states where judicial foreclosures are prominent, a local sheriff or court official conducts judicial real property sales since these foreclosures are handled through the court system.
States where non-judiciary foreclosures are prominent are also known as deed of trust states. A deed of trust involves the borrower, the lender and a trustee. It is the trustee who then conducts the foreclosure sale. The trustees purpose is to ensure the sale is fair and reduces the debt owed as much as possible.
It is also important to note that during the COVID-19 pandemic, the Federal Housing Finance Agency announced a foreclosure moratorium through at least August 31, 2020, to help homeowners at risk of foreclosure due to the coronavirus financial burdens. So, while the local government and the lender have the ability to conduct foreclosures, during times of national emergencies, the United States government can overrule.
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Get The Most Up To Date Title Information
A title search is always recommended for any real estate transaction. A title company will check the property for liens as well as verify that the deed to the home is correct. A title search is especially important when buying an REO property due to the unique transfer of ownership at foreclosure. There may be liens on the title that may not be uncovered until the closing process begins. Again, a real estate professional who is experienced in foreclosed homes can be a valuable resource in guiding you through this process.
The Bottom Line: Consider Purchasing A Foreclosed Home
If youve dreamt of making the move to homeownership but your budget is tight, buying a foreclosed home might be the right choice for you. Its possible to find foreclosed homes that are being offered at below-market rates.
Again, dont rush into this decision. Its best to work with a real estate agent who can explain both the pros and cons of buying a foreclosed home in your community. And before you make an offer, be aware of the additional risk you might be taking on when you dip into the foreclosure market.
Already on the search for a foreclosed home to purchase? If youre not sure how to budget for a mortgage, use our mortgage calculator to estimate how much principal and interest youll pay each month.
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How Long Does Foreclosure Take
Properties foreclosed in the second quarter of 2021 had spent an average of 922 days in the foreclosure process, according to the U.S. Foreclosure Market Report from ATTOM Data Solutions, a property data provider. This is down slightly from the previous quarters average of 930 days, and up 34.5%, from 685 days, in the second quarter of 2020.
The average number of days varies by state because of differing laws and foreclosure timelines. The states with the longest average number of days for properties foreclosed in the second quarter of 2021 were:
The graph below shows the quarterly average days to foreclosure since the first quarter of 2007.
Can You Avoid Foreclosure
Even if a borrower has missed a payment or two, there still may be ways to avoid foreclosure. Some alternatives include:
- ReinstatementDuring the reinstatement period, the borrower can pay back what they owe before a specific date to get back on track with the mortgage.
- Short refinanceIn a short refinance, the new loan amount is less than the outstanding balance, and the lender may forgive the difference to help the borrower avoid foreclosure.
- Special forbearanceIf the borrower has a temporary financial hardship, such as medical bills or a decrease in income, then the lender may agree to reduce or suspend payments for a set amount of time.
Mortgage lending discrimination is illegal. If you think youve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development .
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How Does Foreclosure Work
Foreclosures are likely to occur when the homeowner has failed to make agreed-upon payments on the mortgage, but the reasons behind nonpayment can vary. Sometimes, job or income loss is the culprit. Medical bills or credit card debt might make it impossible for the homeowner to stay afloat. Foreclosure can also be the result of bankruptcy, divorce, or disability.
In some states, there must be a court proceeding before the home can be taken. Other states offer options that don’t require a court to get involved.
A lender can’t legally foreclose on a home until the homeowner is at least 120 days behind on their mortgage payments.
Can You Get Out Of Foreclosure Once It Starts
The good news is that even if you have received a notice of default and the foreclosure process has begun, you can still get out of foreclosure. Of course, it is better to avoid the process altogether, if possible. For example, if you are no longer able to make the mortgage payments, you may want to consider selling your home before you are forced to foreclose.
If you are struggling to make your mortgage payments, you may be allowed to pursue mortgage forbearance. Mortgage forbearance allows the homeowner to put payments on pause or reduce payments for a limited amount of time. This does not erase or reduce your total debt instead, it provides the homeowner time to find financial footing. The homeowner will still be required to pay the debt.
You may also try to refinance your home before the foreclosure process begins. If you act before the foreclosure process, you put yourself in a better position to lower your mortgage payments to an affordable level with a new loan than you will after your credit score reflects your foreclosure.
If you do receive a notice of default, the most effective way to get out of foreclosure is to make payments. If you start making payments regularly again, your mortgage lender is less likely to foreclose on your home.
Another way to stop foreclosure proceedings is to file for bankruptcy. Declaring bankruptcy will pause or possibly stop the process.
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Execute Paperwork & Close On The Property
This stage is where the previous homeowners title will be transferred to you. Once the lenders underwriting has approved the buyer and property, you will receive a commitment letter. The closing attorney or title company will set a closing date. The time it takes from accepting an offer to closing varies depending on the property but can typically range from 30 to 60 days. If you are paying for the properties with cash, this time frame is usually shorter.
You will be accountable for paying all closing expenses, such as transfer taxes, title insurance, lender fees, and property taxes, at the time of settlement. Closing costs can range from around 3% to 6% of the loan amount. If you take out a $300,000 mortgage, closing costs will vary from approximately $9,000 to $18,000. The title company will handle money transfers between you, your lender, and the seller. You will receive the keys, and the preforeclosure property will be yours once the fees are paid and the paperwork is signed.
However, if you intend to close in the name of your limited liability company rather than your own, make sure that the lender allows you to do so before applying for loans. Putting all your investment properties in an LLC adds protection. But if you own properties in multiple states, you should have an LLC in each state because laws and taxes vary per state.
Determine How Much Home You Can Afford
Budgeting matters when buying a foreclosed home. Yes, you might be able to nab your new home at a lower price tag. But foreclosed homes arent free. And despite what you might have heard, you cant buy a foreclosed property for $1 either.
Youll need to craft a household budget listing your monthly income and expenses to determine how much of a mortgage payment you can afford each month.
If you dont do this, you might purchase a home you cant afford even if youre looking for a foreclosure. By purchasing a home thats out of your budget, youll struggle to make your own mortgage payment each month.
As with any home purchase, its important to predetermine your debt-to-income ratio. As the name suggests, this ratio analyzes how much of your gross monthly income your monthly expenses will consume.
Most lenders want your monthly debts to take up no more than 43% of your gross monthly income. If your debt-to-income ratio is higher than that, youll struggle to qualify for a home loan.
Be especially careful when buying a foreclosed home. You might be tempted to buy a foreclosure with a price tag thats at the very top of your budget.
The problem with this is that the foreclosed home might require expensive repairs. If youve purchased a home at the top of your budget, you might not have enough money to afford those needed repairs.
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What Happens When A House Is Foreclosed By A Bank
Unfortunately, when a house is foreclosed by a bank, it takes years for the owner to recover. For example, nearly 7.8 million foreclosures happened during the 10 years between 2007 and 2016. When you see numbers that high, it is hard to see the individuals they represent. Foreclosures happen to real people no matter their socioeconomic status.
During this housing crisis, one family lost their home of over 40 years after the father figure was forced into early retirement. Suddenly, they didnt have money to cover their mortgage through Wells Fargo in 2010. shares the story of the aftermath:
In the following years, the Landis attempted to apply for loan modifications and filed for bankruptcy before finally being forced out of the home. After they had to leave the home, the Landis begged several landlords to give them a chance despite their poor credit. The Landis moved to Florida where they bought another home. Because their credit was destroyed by the previous foreclosure, Maria Landi said they now pay a mortgage with a very high interest rate.
We share this story because it is important to understand what happens when a house is foreclosed by a bank. It is a lengthy and tedious process that destroys credit and requires years to recover financially.
Benefits Of Buying A Foreclosed Home
- Lower prices: One undeniable benefit is that foreclosed homes almost always cost less than other homes in the area or they are listed below market value. This is because theyre priced by the lender, who wants the home off of their books.
- Standard loan configurations: You might have to follow a slightly different bidding and buying process when you buy a foreclosure, but you still have a few loan options as long as its not a cash-only auction. As long as the home youre considering is in livable condition, you can get a conventional loan or a government-backed VA loan, FHA loan or USDA loan to buy it. Government-backed loans can make homeownership more affordable, but you if the property is damaged, the government may require work to be done.
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